HECTARAGE AND OUTPUT RESPONSES OF MAJOR CROPS TO MARKET LIBERALISATION AND PRICE RISK IN NIGERIA

ABSTRACT

Liberalization  is part of the ongoing  domestic  market  reforms and globalization  policies  that redefined government responsibility and actions, which affect agricultural development, and the welfare of farmers. This study examined hectarage and output responses of major crops to market liberalization, price risk and financial support. The objectives were to describe trends of output, hectarage and prices of these crops, as well as describe trends of non-price factors and estimate the effects of these factors on hectrage and output of selected crops. The study covered a period of

38 years  from  1970  to 2007.  Secondary  data were  obtained  from  the Food  and  Agriculture Organization (FAO) Statistics Data Base, Publications of Central Bank of  Nigeria, (CBN) and National  Bureau  of  Statistics.  Data  were  analysed  using  descriptive  statistics  and  seemingly unrelated regression model estimation. The descriptive statistics results showed that output of rice was the lowest among the cereals. It ranged from 403,000 to 4,165, 070 tonnes. Fluctuations that characterise nominal prices also marked the price risks. The nominal price risks for maize, rice and  yam  were  the  highest  among  the  carbohydrate  staples  from  2005  to 2007.  Time  series property  analysis  showed  that  the  variables  satisfied  criteria  for  estimation  of  ECM  for  the hectarage allocations and output  estimates.  Regression analysis showed that the coefficient  of determination for hectarage and output equations accounted for about 80% and 85% of variation in hectarage and output of the majority of the crops. Price and price risks were major determinants of hectarage allocation and output of the crops. Real exchange rate had positive relationship with hectarage  of yam but negative relationship with output of beans, cocoa and coffee. Volume of rainfall had positive relationship  with the output of rice, yam and cocoa beans but a  negative relationship with those of maize, sorghum and oil palm. Ten percent increase in rice price will lead to about 16 and 24 percent increases in its hectarage  and output,  respectively.  Sorghum showed a similar pattern only that an increase in its output was 9 percent, which was less than that of rice. It was recommended that farmers should cultivate crops such as rice, maize, cassava and yam have positive relationship with the liberalization exercise. The Government should continue to attract FDI since it had positive impact on output of rice, yams, beans and cotton coffee and oil palm as well as increase funding of  ACGSF since it had positive impact on hectarage of rice, maize, cassava, groundnut, and oil palm. Nigerians should redirect their taste to local foodstuffs and goods made from local agricultural raw material to limit the effect of market liberalization through substitution  with imports. This is because the consumption of imported food products, which  has  local  substitutes,  limits  demand  for  local  production,  which  will,  results  in  low hectarage allocation and subsequently lower output.

CHAPTER ONE INTRODUCTION

Okuneye,  Aromolaran,  Adetunji,  Arowolo,  Adebayo  and Ayinde  (2001);  Alabi  and Chime,  (2008)  have,  attributed  the  present  economic  problem  in  Nigeria  to   the   poor performance of the agricultural sector and have argued that the persistent economic recession in Nigeria since the post oil boom era, could be corrected  with  improved performance  of the agricultural sector. The near collapse of the Nigerian agricultural sector during the era of oil boom (1972 – 1975) and the increasing  food  insecurity  are as a result of inconsistent  and unfocused  government  policies  (Alabi  and   Chime,  2008).  The  small-scale  farmers  that dominated the production sector produce about 85% of the total output (Okuneye, 1995). The majority  of  the  farmers  are  small  scale  producers  who  are  affected  by  inconsistent  and unfocussed  government  policies,  and  poor  infrastructure  resulting  in low production,  high prices of food items, and underdevelopment  of the sector and poverty of farmers (Alabi and Chime,  2008).  Ojo  (1994)  argued  that  the  Nigerian  agricultural  sector  was  rendered  less competitive over time through over-valued currency, inappropriate pricing policies and rural- urban migration, which caused the dearth of farm labour. Other factors that can militate against agricultural production in Nigeria include declining arable land area per capita, erratic rainfall and climatic change, poor input supply such as fertilizers, low capital  expenditure  and poor financial resources (Imahe and Alabi, 2005). Mahendra  (2007)  aptly noted that agricultural GDP in parts of the developed  world will benefit from  climatic  change,  whereas  in many developing regions it will decrease. The present poor state of agriculture may not necessarily cause the eradication even from the mind, of the positive and significant role it played in the Nigerian economy.

The agricultural sector used to be the mainstay of the Nigerian economy. The exports of primary agricultural products dominated its external trade, especially from 1960 to 1970 when the exports of cocoa, palm produce (palm oil and palm kernel), groundnuts, cotton and rubber accounted for about 80% of total exports. It was also recorded that Nigeria  was the largest exporter of groundnut, accounting for 40% of the world supply (Oyejide, 1987). The sector was the main source of food for the population  and served as means  of livelihood for over 70 percent of the population as well as major source of raw  materials for agro-allied industries (Alabi, Aigbokhan and Ailemen, 2004). The Dutch disease phenomenon which crept into the economy as a result of the crude oil boom and the neglect of other productive sectors adversely affected  agriculture.  The  neglect  of  the  agricultural  sector  resulted  in  a  decline  in  food production,  increased  rural-urban  migration  and importation  of food. By the mid-seventies,

declining output of the agricultural sector and the increasing domestic consumption needs made output of primary commodities such as palm oil, cotton and rubber to fall in the export trade. For example, groundnut completely disappeared from Nigeria’s export  while cocoa declined from its 30% contribution to export to about 10% (Olopoeni, 1991).  Before the oil boom in the early 1970, by 1970 itself, the percentage share of agricultural export was 31.62 and proportion of  food  imports  in  relation  to  total  imports  was  9.1  percent.  These  values  of  share  of agricultural export have continued to be on the decline while that of food imports has continued to incease.  The nominal value of agricultural export increased from 0.22 billions to 38.57 for the periods under review but the real value when defleted with exchange rate shows that value of  agricultural  export  was  more,  prior  to  the  oil  boom  era  and  shortly  during  that  era. Acomposite view of performance of Nigerian agricultural export is presented in Table 1.1.

Table 1.1: Nigerian Agricultural Export Performance in relation to Food Imports

Year	Total Agric. Export		Exchange rate		Share of Agric. export in Total		Tood imports as
(N’ Billions)                                             export (%)                % of Totl Imports
1970-1974	0.228		0.628		14.462		9.064
1975-1979	0.323333		0.589		4.308333		12.93667
1980-1984	0.24		0.763		2.448		18.27
1985-1989	1.256		4.491		4.476		12.156
1990-1994	3.30		19.925		2.148		8.064
1995-1999	16.186		81.100		1.516		13.54
2000-2004	17.18		95.783		0.628		12.172
2005 only	38.57		128.27		0.61		9.41

Adopted from Idachaba, 2006;  Achike, Mkpado and Arene, 2008.

The performance of the crude oil sector improved considerably while that of agriculture and other sectors of the economy fared badly. But by the early 1980s, there was a slump in the world crude oil market. Owing to over-dependence on crude oil export, serious economic crises set in on the economy because of inadequate fund to execute national projects. This led to an increase in Nigeria’s external debt from one million United States dollars in 1970 to 21 million in 1981 (Oyejide 1987). It was recorded that by 1984  there were about 30 importable crops under ban (Oyejide 1987). This measure reduced external debt to US $9.4 billion but by 1986, the external debt rose to about US 12 billion (Olusegun, 2006)

The need for complete overhauling of the economic system led to the introduction of the Structural Adjustment Programme (SAP) in 1986. The objectives of SAP include to:

i.         diversify  Nigeria’s  production  and  exports  based  on  promotion  of  agricultural production  and exports,

ii.        liberalize trade and exchange rate so as to achieve relative price structure in  the economy which will be suitable for export promotion and import compression.

The  removal  of  restrictions  or  control  to ease  exchange  of  goods  and  services  is  termed liberalisation, and when such an exercise aids the exchange of goods and services across the boundary of a country it is termed trade liberalisation, but when it aids the exchange within a country, it is termed market liberalisation however, both type of liberalisation are linked. The removal  of  commodity  marketing  boards  to  allow  the  forces  of  demand  and  supply  to determine price is a major market liberalisation policy in Nigeria. When the forces of demand and supply interact to set price (instead of government price regulations), producers face higher price fluctuations leading to  price risk and the price risk is a measure of the deviation from the

present price.

The libralization  of agricultural  marketing  services  has been part  of a  World Bank/IMF package of economic reforms in developing countries within the SAP period. The argument  has been that the agricultural  sector in developing  countries  is  inefficient  due to various state interventions with respect to marketing, pricing and  various forms of subsidies (Chirwa, 2000).The implementation of SAP led to adoption of floating foreign exchange which resulted in depreciation in the relative value of naira by more than 100% (Khan and Knight,

1985;  Soludo,  1995).  Trade  liberalisation  was  also  accompanied  with  domestic  market liberalisation. Thus, the introduction of SAP resulted in the abolition of commodity marketing boards (CMBs). The closure of CMBs, provided a good opportunity for the Nigerian Export Promotion Council to be established and independent or private exporters were also registered to facilitate trade. This exposed farmers to greater price volatility/instability, despite the efforts of the export promotion council, which concentrated on increasing production and exportation of some crops, while domestic demand and supply determine mainly the price of other crops. In other  words,  market  liberalisation,  a  SAP  component  can  cause  financial  (exchange  rate, interest rate, and price) volatility at least in the short-run and this phenomenon is capable of increasing  price  risk  with  adverse  consequences  on  hectarage  expansion  by  agricultural investors.

Despite exchange rate volatility and price risks, the agricultural sector as a whole grew considerably since 1987 after the introduction of SAP and liberalisation of both internal and external markets (Soludo, 1995; Olusegun, 2006). Could this be growth or development and what are the factors that led to it? Agricultural farm gate producer prices were formally fixed

by technical department of the marketing boards but for sometime now are purely  markets determined.  It has been documented  that the free market  pricing policy under  SAP led to increase in agricultural production and nominal income of farmers. (Ajakaiye,1987; Oyejide,

1990;  Kwanashie  et  al,  1998).  Given  the  increased  production,  the  expectation  of  policy makers is that liberalisation of the market will make price stable since opening up markets will make  price  stable  because  it will  result  in a greater  number  of  producers  and consumers adjusting  their  supply  and  demand,    respectively  thereby  reducing  adjustment  in  prices (Olusegun, 2006). There is need to verify whether the experience during SAP was just growth or actually development by examining the effects of the ongoing liberalisation of agriculture.

It is not an overstatement to say that agriculture is instrumental to national development in   sub-Saharan   African   developing   economies.   Consequently,   adequate,  effective   and sustainable  funding  of agricultural  projects  especially  at micro  level, which constitutes  the major proportion  of the economy,  has been a re-occurring  issue in development  literature. Nigerian governments  had adopted various methods to  meet this need, one of which is by seeking the assistance of the private sector of the economy. Private financial institutions resent granting loans to small-scale farmers, whether as individuals or as a group, on the premise that such farmers can not provide adequate collateral and also because high risk and uncertainties are the hallmark of agriculture due to its biological nature.  Efforts to improve financing may not produce the desired result if the industry is not lucrative due to poor pricing hence, the need to determine the factors affecting price.

The removal  of government  price support due to liberalisation  does not imply  that government is no longer interested in price stabilization and increased output. Other non-price incentives,  which  can  increase  investment  and  production  that  Nigerian  government  has continued to use, include micro-finance, especially the Agricultural Credit Guarantee Scheme (ACGSF), rural infrastructure and attraction of foreign direct investment (FDI).

According to World Trade Organization  (WTO 1998), a holistic view of  agriculture shows that the area under cultivation was about 34 million hectares, representing about 37% of total arable land mass. Post harvest losses are substantial, estimated at 40% of farm gate output (Ogunkola,  2003).  Farmers  are  also  characterized  by a  strong  dependence  on  agricultural labour  market,  relatively  little  forms  of  savings  or storage  facilities  and cultural  practices adopted are highly labour intensive. The socio-economic and production characteristics of the farmer, inconsistent and unfocussed government policies, and the poor infrastructural base, all interact in a strong way to destroy the sector, resulting in low production, high prices of food items, inflation, underdevelopment and concomitant poverty (Alabi and Chime, 2008). Due to the fact that the majority practises extensive farming, measurement of agricultural development

needs to include consistent increase in hectarage, because given extensive production system, the  larger  the  hectrage,  the  larger  the  output  ceteris  paribus.  Thus,  hectrage  is  a  major determinant of output and can be very senitive to price risk. Price risk is the proportion of the prevalling price series that farmers can loose or gain due to changes in market.

1.2 The Problem

Food  insecurity  is  threatening  the  life  and  health  of  millions  of  Nigerians.  Food production in Nigeria has not kept pace with population growth. This is because the population is growing at about 3.2 percent per annum while food production rate is at about 2.2 percent (FAO, 2005). Food importation is used to supplement domestic production but this drains the country’s  foreign  exchange  earnings.  For  example,  in  1970,  when  the  economy  was  not liberalized,  food import value was US $81.89  million  but by 2003, when liberalisation  has reached almost all aspects of the economy, food import bill came to $2,018.38 millions (CBN, 2004).

The demise of CMBs as a result of liberalisation has exposed producers to more price risk in addition to production risks. The fluctuations in prices which give rise to price risks can adversely affect production. Are Nigerian farmers risk averse? What are the effect of ongoing libralisation  on hectrage  and output  of major crops?   Many studies  on  agricultural  supply response have neglected the effect of market liberalisation and  price risk on gross domestic supply. Instead, a number of studies have examined the effects of price and exchange rate on the volume of agricultural export either holistically or for specific crop or group of crops. To illustrate,  Adubi  and  Okunnmadewa  (1999)  examined  the  relationship  between  price  and exchange rate volatility on agricultural exports as a whole. Studies that involved specific crops included those by Philips (1996), Ayichi (1997), Chidebelu et al (1998), Arene and Odusolu (1998), Arene and Okafor (2000), Arene (2000), Okoli and Okoye (2005). These studies have concentrated on the  effects of price and exchange rate on the export of one or a few of the following  crops:  cocoa  beans,  groundnuts,  cotton,  palm  produce  and  cassava  but  ignored measuring effects of libralisation on the exports.

Market  liberalisation  has  continued  from  the  principles  of  Structural  Adjustment Programme  (SAP),  which  ended  in  1994.    For  instance  in  1988,  the  National  Fertilizer Company of Nigeria (NAFCON) was established. Due to low production capacity and the fact that  fertilizer  is  the  most  important  tradable  agricultural  input  in  Nigeria,  the  Federal Government of Nigeria (FGN) continued to import fertilizers till 1994.   From 1995 to 1996, FGN stopped the direct importation of  fertilizer and it became the sole responsibility of the private  sector  while  NAFCON  and  the  blending  plants  were  the  agents  responsible  for distributing  locally  produced  fertilizer.    States collected  their  fertilizer  allocation  from  the fertilizer plants and the FGN reimbursed the transport costs later. In 1997, FGN  completely eliminated fertilizer subsidy programmes and adopted a complete privatization/liberalisation of fertilizer sector (Kwa, 2002; Nagy and Edun, 2002). This  liberalisation has implications for price risk, hectarage allocation and output. Market liberalisation has reached many aspects of Nigerian agriculture as World Development Report (WRD, 2008) recorded a negative nominal rate of assistance for Nigeria’s agriculture in 2005. United Nations (UN, 2008) was of the view that it is now time to  examine impacts of libralisation in developing economics.  Studies in Nigeria need to reflect this.

Literature on the effects of the degree of openness on hectarage is lacking. Agricultural supply response is yet to be examined in the context of trade intensity especially with respect to gross domestic output. According to Oyejide (1986), the choice of trade policy has significant implications for food demand and supply in an economy. This is because trade and associated policies influence the structure of incentives for agriculture as compared to other sectors of an economy. Trade policy can have impact on the movement of resources to and from agriculture which  can  encourage  or  discourage  food  production.  Trade  and  associated  policies  have implications for the structure of relative domestic prices, which help to determine whether self- sufficiency in food  production is possible or even desirable. The liberalisation  of trade and domestic  market  has  exposed  domestic  producers  to  price  competition  with  large-scale producers elsewhere. This price competition tends to exert a downward pull on the domestic prices and increases price instability, which gives rise to more price risk.  However, the aspects of trade policy that has attracted the interest of some scholars have not included measuring the policy impact on hectarage expansion. For example, the  study  by Oyejide (1990) examined theoretical  issues  in  supply  response  in  the  context  of  SAP  in  sub-Saharan  Africa  while Kwanashie et al (1998) examined the response of agriculture in Nigeria to adjustment policies. Similarly, Olusegun (2006) examined the effects of price, price risk, and real exchange rate on hectarage  response  of few crops in  the context  of SAP.  His work  did not cover much of Nigerian liberalisation experience as only a dummy variable was used to measure it.  But the effects of degree of openness which is a good measure of trade liberalisation, because it deals with changed in values of exports and imports,  as well as  ACGSF and FDI in agriculture are yet to be examined.

The effects of degree of openness will show the crops, which are affected by  trade either positively or negatively.  It will indicate the effects of trade policy on the  productive sector of the economy, which can give insight into the possible effect of Ducth disease in the sector,  but  literature  need  to  buttress  or  refute  these  facts  with  Nigerian  experience.    In addition, effects of ACGSF and FDI will indicate the responsiveness of crops to such funds.

Most  of the FDI are given  to research  institutions  whose  mandates  include  production  of improved  breeds.  Positive  response  of  output  of  crops  to  FDI  could  be  an  indication  of production   and  distribution   of  improved   breeds  to  farmers  and   constitute  criteria  for justification of the invested fund, but research has neither buttressed nor refuted this point.   It may be informative to note that as the economy gets more liberalised; its degree of openness increases  and  foreign  investors  can  be   attracted,  thus  increasing  the  volume  of  FDI. Nevertheless, we do not know which crops loose or benefit from these experiences in Nigeria?

Food insecurity, price risk and resource allocation as well as output can be influenced by the price of local produce which the ongoing liberalisation exercise  determines. Prior to liberalisation, price is controlled by government regulation, giving rise to minimum price risk, but liberalisation  emphasizes  market  forces  by which  demand and supply  determine  price. While government subsidies and trade restrictions  distort prices to local farmers’ advantage with little risk, the complex process of price discovery and determination involves different lag periods  and fluctuations  in a  liberalized economy  which  give  rise  to high  price  risk.  The cobweb theorem of agricultural prices is mainly a pictorial illustration of price risks occasioned by forces of  demand and supply in a liberalized economy.   The determination  of prices by market forces posse the question of whether self-sufficiency in food production is desirable or attainable. Given that liberalisation reduces government control of imports/exports, the size of domestic market can exceed the national geographical boundary resulting in price fluctuations and  risk.  The  ongoing  liberalisation  is believed  to attract  FDI  inflows  which  can  help  to increase the quality of inputs and possible output at a lower cost which can reduce price; hence issues  involving  market  liberalisation  and  price  risks  appear  complex  and  need  critical examination from different paradigms.

Methodological   issues  need  to  be  resolved  especially  with  respect  to   analytical procedure and model specification when dealing with supply response. Many studies on supply response may have been marred by spurious regression due to lack of testing for stationarity of the roots and possible co-integration, which may lead to adoption error correction mechanisim in the model. Can Nigerian liberalisation episodes be better  measured with a dummy or an index?   Also, it is doubtful  whether  hectarage  responses  to price and price risks could be modeled independently  as if the effects of price and  price risks are not simultaneously  felt. Olusegun (2006) has estimated independence  equations for hectarage responses to price and price risks. Could his result be affected  by  the methodology?  If so, untrue information may have been sent to policy markers due to inefficiency of the estimates. Many studies (such as those by Olopoeni, 1991; Adubi and Okunnmadewa, 1999; Arene and Okafor, 2000) on supply response  in  agriculture  have  concentrated  on  the  volume  of  export  without  considering hectarage  allocation.  The study intends to fill this methodological  controversy/debate  using Seemingly Unrelated Regression (SUR) model.

1.3 Objectives of the study

The broad objective of the study was to examine the hectarage and output responses of major crops to market liberalisation, price risk and financial support for selected crops using descriptive and inferential statistics.   The specific objectives were to:

i.         examine the trends of hectarage, output levels, prices and price risks of the selected crops for the period under study;

ii.        examine the trends of non-price factors such as market liberalisation indicators and financial support that can affect development of the crop sub-sector;

iii.       determine  hectarage  and output responses of crops to price and non-price factors;

iv.       simulate the responsiveness of hectarage and output of selected crops to changes in own price; and

v.        make recommendations towards increasing agricultural output.

1.4 Hypotheses

The null hypotheses that guided the study were:

I.     liberalisation exercise has not affected hectarage and output   of crops such as maize, rice, yam, cassava, groundnut, beans, cotton cocoa and oil palm from 1970 to 2007;

II.      price and non-price factors such as rainfall, ACGSF and FDI do not affect hectarage and output of crops listed above.

1.5 Justification

Liberalisation policies have been advocated and implemented both at international and national levels. Market liberation has exposed farmers to more price risk than ever  before. There is the need to examine how the price risk affects agricultural  supply with  respect to factor utilization and output. It is generally accepted that as a result of the oil boom, that Dutch disease phenomenon adversely affected not only agriculture but the whole economy. However, this study will shade light on the crops that are adversely affected and explain why such crops are in that state.  This  thesis  is justifiable  because  it  is aimed  at examining  the effects  of liberalisation policy on agricultural supply response with emphasis on price risk which affects the welfare/income of farmers. Over 80% of Nigerians are engaged in agricultural activities. This sector (agriculture) under-employed the largest labour force of the country, which can be mobilized for higher  productivity; this demands that policy makers drive the economy with empirical results of effects of the on-going policies on resource allocation, output and price.

The ability of small-scale farmers to attain profit maximization goal or satisfy their food security needs is determined by the prevailing policy environment, which influences price and hence the need to examine the effects of this policy on agriculture. Price is an important factor in resource allocation, production and consumption of goods and services within a society. It is the edge that forms a basis for exchange of title to goods and services. Hence, it is important to examine the effects of price.

The study will provide empirical results of effects of domestic market liberalisation on agricultural supply response. This will complement other studies on supply response involving international  trade. Special interest is placed on degree of openness and real  exchange rate, which can help to explain the dynamic of how exchange rates pass through to domestic prices. The degree of effect of exchange rate on the prices of goods in the economy depends on the substitutability  and  import  penetration  ratio,  which  can  be  a  reflection  of  the  degree  of openness.  It will also highlight methodological issues that may be of help to other researchers. It will as a result constitute a part of literature on agricultural supply response.

Extension workers and farmers will be able to know the responsiveness  of crops  to institutional  factors,  thus  farmers  can  choose  crops  that  respond  positively  to  institutional factors in order to maximize their profit. This research can also interest other change agents and policy makers.

Limitations of the study

The study was aimed at examining hectarage and output responses of crops to market liberalisation and price risk in Nigeria. These crops are grown under the same macroecomomic environment.   Its ambition was to examine the responses of both the major and minor crops, but for lack of data especially for the minor crops limited the study to few representatives of major class of crops. However, crops that were viewed as minor such as cocoyam are gaining more economic importance,  thus in the next two  centuries, more data will be available for almost all the existing crops now. Surprisingly, adequate data was lacking in the case of rubber and little or no data was found on citrus. This shows the need to build up agricultural database via adequate documentation of agricultural data.

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